UNDERSTANDING DIFFERENT TYPES OF BUSINESS ENTITIES IN MALAYSIA

Businesses which fall within the ambit of the ROB 1956 are: -

 

• sole proprietorship; and

• partnership.
   

While under CA 2016, the classification of a company can be based on: -

 

• the liability of members as a company limited by shares, company limited by guarantee or an unlimited liability company; and

• its identity as a private, public or public listed company.

 

For the purpose of this article, we highlight different types of business entities that can be registered in Malaysia to meet one’s business goals.

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1. Registration of Business under the Registration of Businesses Act 1956

 

The below business structures are not separate legal entities and its business owners bear unlimited liability at their personal capacity.

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(i) Sole Proprietorship
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A Malaysian citizen or permanent resident thinking of starting a small business on their own can set up a sole proprietorship. It is one of the simplest business entities to consider in Malaysia.

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The sole proprietorship refers to a business carried out by a single person in his own name. There is no separation between the business’ assets and personal assets or obligations of the person conducting the business.

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The sole proprietor signs all the contracts relating to the business, owns its assets and is personally liable for its debts as his liability is unlimited. Due to its unlimited liability nature, a sole proprietor is responsible for all debts against the business and personal income or assets of the owner will not be protected if the company is declared bankrupt or is in debt. 

 

(ii) Partnership
 

A partnership is one of the easiest business entities to consider in Malaysia should Malaysian citizens or permanent residents intend to start a business venture with business partners.

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The partnership business entity is a joint-entity holder with two (2) or more members but shall not exceed twenty (20) members to carry out a legal business in Malaysia. It is governed by the Partnership Act 1961 (“PA 1961”) or self-created partnership agreements where it outlines the responsibilities and liabilities of each partner.

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In terms of liability, a partnership is not considered as a separate legal entity and thus, all partners are liable towards any conduct that is done for the partnership. This is also enunciated under Section 11 of the PA 1961 which mentions that all partners are generally jointly liable for a contract that had been executed while they were partners as well as in tort under Section 12 of the PA 1961. Not only that, according to section 19(2) of PA 1961, a retiring partner would still be liable for any debts or obligations incurred while he was a partner.

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2. Registration of Companies under the Companies Act 2016

 

Business structures under this category are separate legal entities and offer protection for its owners as the company’s liabilities are separated from its directors and shareholders (with exceptions, of course – in which we shall discuss in another article).

 

(i) Limited and Unlimited Liability Company

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There are three types of companies specified under Section 10(1) of the CA 2016: -

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• Company limited by shares - Section 10(2) of CA 2016 stipulates that a company limited by shares is a company formed on the principle of having the liability of its members limited to the amount unpaid on the shares held by them. Since the shareholders have limited liability, they cannot be made liable for the company’s debts beyond what they have paid for their shares. The creditors also cannot sue the members for the company’s debts if the company’s funds are insufficient to pay off the debts and creditors cannot request for payment from the members.

 

• Company limited by guarantee - According to Section 10(3) of CA 2016 and the Guidelines on Company Limited by Guarantee issued by the Companies Commission of Malaysia (CCM), a CLBG is a public company incorporated with the principal liability of its members limited by constitution to such amount as the members undertake to contribute to the assets of the company if the company is wound up. This means the members cannot be made liable for the company’s debts beyond what they have guaranteed to pay upon the company’s winding up. A company limited by guarantee does not have any share capital and is known as a non-profit company as it is not allowed to distribute any profits it makes or declare dividends. Their source of funds is the initial amount contributed by subscribers and from member’s subscription/annual fees and other social activities.
   

• Unlimited company - Unlimited company is similar to sole proprietorship and partnership in that their members' liability is unlimited. The only difference is that they have a special Articles of Association and are free to return the capital to its members. Such companies may be registered as a private company or public company. It may be a company limited by guarantee or by shares and its members are liable in a winding up for the debts of the company without limit if the company has insufficient assets to meet its debts.

 

(ii) Private Company and Public Company

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A company may also be categorised as follows: -

 

Private company

 

A private company is commonly known in Malaysia as Sendirian Berhad (Sdn. Bhd.).

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To establish a private company, Section 42 of the CA 2016 provides that a private company shall have not more than 50 shareholders. Upon having more than 50 shareholders, the Registrar shall serve a notice to the company and the company ceases to be a private company.

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Furthermore, the private companies are also prohibited from offering to the public its shares and to invite the public to deposit money with the company for a fixed period or payable at call, whether bearing interest or not bearing interest, as stipulated under section 43 of the CA 2016.

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A private company enjoys the benefit of the separation of legal entities. Separate legal entity refers to the company having its own legal personality that is separate from its members and as such, it has the ability to carry on business, acquire, own, hold, develop or dispose property under the company own name, enter into legal contracts, and sue or be sued in court.

 

A private company shall have at least one director who shall be at least 18 years old and ordinarily resides in Malaysia by having a principal place of residence in Malaysia. The director must also not be an undischarged bankrupt, been convicted of an offence of bribery, fraud or dishonesty or disqualified by the Court.

 

Public Company

 

A public company in Malaysia is commonly known as Berhad (Bhd.). Public company is one of the business entities in Malaysia that is suitable for companies with large business operations.

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The corporate structure of a public company allows the raising of capital from the public. It provides bigger financial advantages than a private company as it has unlimited numbers of shareholders and high opportunities in terms of financing and expansion of the company. In Malaysia, if a company meets all the listing requirements set by Bursa Malaysia Securities Berhad, its shares may be listed in the Bursa Malaysia.

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Unlike a private company, a public company requires two directors who shall be at least 18 years old and ordinarily reside in Malaysia by having a principal place of residence in Malaysia.

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